IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `B' NEW DELHI
BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT
AND
SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER
I.T.A.No. 3130/Del/2010
Assessment Year : 2007-08
Devi Lal Coop. Sugar Mills Ltd., vs ACIT,
Village Ahulana Teh. Gohana Sonepat Circle,
Distt., Sonepat. Sonepat.
(PAN: AAATC3088Q)
(Appellant) (Respondent)
Appellant by: Shri Manoj Kumar
Respondent by : Miss Ashima Neb, Sr.DR
ORDER
PER CHANDRA MOHAN GARG, JUDICIAL MEMBER
This appeal has been preferred by the assessee against the order of
CIT(A), Rohtak dated 06.05.2010 in Appeal No.322/SPT/09-10 for AY 2007-
08.
2. The assessee has raised following grounds in this appeal:-
"GROUND NO. 1
That the Learned CIT(A) erred in law and in fact in enhancing
disallowance made by the A.O. at Rs. 16,26,000/- to Rs.
19,58,785/- i.e. by Rs. 3,32,785/- under the head "Repairs &
Maintenance" of non-factory building of the appellant without
giving any prior notice to the appellant to that effect on wrong
and untenable grounds.
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That the Ld. CIT(A) erred in law and in fact in
confirming the disallowance of Rs.16,26,OOO/- under the head
"Repair and Maintenance" as non-factory building on wrong
and untenable grounds. He further erred in holding that the
amount has been spent for bringing a new asset into existence
i.e. the roof of the godown or for improving the existing assets
that is godown and further erred in holding that it is capital
expenditure and not allowable as deduction on account of
repair and maintenance.
As a matter of fact and law, the entire expenditure spent
by the appellant is on account of Repair and maintenance of
non-factory building amounting to Rs. 19,58,785/-and is
allowable as a revenue expenditure.
Ground No. 2
That the Ld. CIT(A) erred in law and in fact in
confirming the disallowing and adding back an amount of Rs.
1,42,97,973/- made by A.O. out of interest account payable to
Haryana Govt. u/s 43(B) of the I.Tax Act.
That the Ld.CIT(A) admitted that the appellant's case
apparently does not fall under any of the clauses mentioned u/s
43(B) of the I.Tax Act.
Under the fact and circumstances matter above the
amount of Rs. 1,42,97,973/- payable to Haryana Govt. can not
be disallowed u/s 43(B) deserve to be deleted.
GROUND NO. 3
That the Ld CIT(A) erred in law and in fact in confirming
the disallowance and in adding back a sum of Rs. 3,00,000/-
made by AO to the income of the appellant wrongly applying
provision of section 43B to the same."
3. Briefly stated the facts giving rise to this appeal are that the case was
picked up for compulsory scrutiny and notices u/s 143(2) and 142(1) of the
Income Tax Act, 1961 (for short the Act) along with detailed questionnaire
were issued to the assessee. The AO noticed that the assessee debited Rs.
23,21,314/- under the head of repair and maintenance to the profit and loss
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account which was very high as compared to last year figure of Rs. 6,95,345/-.
The AO observed that no justification has been given by the assessee in respect
of increase in these expenses and no bills and vouchers regarding these
expenses have been produced and the AO disallowed an amount of Rs.
16,26,000/- out of these expenses and added the same to the income of the
assessee. During the first appellate proceedings, the CIT(A) adjudicated the
issue and enhanced the disallowance to Rs. 19,58,785/- but the CIT(A) allowed
admissible depreciation thereon.
4. The AO also noticed that the assessee has shown interest payment to the
bank and other financial institutions at Rs.4,98,20,072/- and the liability of
interest during the year under consideration has been increased amounting to
Rs. 1,43,95,657/- which are mainly in respect of loans taken from Banks and
financial institutions. The AO held that under the provisions of section 43B of
the Act, the liability should be discharged before the due date of filing of the
return and the AO allowed part payment of interest of Rs.98,584/- made during
the year to SBI and the balance liability of interest of Rs.1,42,97,073/- which
has been debited to the Profit & loss account and shown as payable in the
balance sheet was disallowed u/s 43B of the Act.
5. The AO also noticed that the assessee has made audit fees provision of Rs. 3
lakh in the liability side of Balance sheet but the AO concluded that since the
assessee had not discharged this liability before the due date of filing the return, hence,
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the same was disallowed and added to the income of the assessee. The AO
also noticed that the assessee has made the payment of old liability of audit
fees of Rs. 3 lakh during the year under consideration but the AO also
disallowed the credit of the same by holding that the assessee did not add back
the same amount in the income of the earlier years.
6. Aggrieved, the assessee preferred an appeal before the CIT(A) which
was also disallowed by enhancing the assessment as stated above. Now, the
empty handed assessee is before this Tribunal with the grounds as reproduced
hereinabove.
Ground No.1
7. Apropos ground no.1, we have heard arguments of both the sides and
carefully perused the relevant material placed on record. Ld. AR has drawn
our attention towards Paper Book page no. 76 to 84 and submitted that the
assessee submitted all the details pertaining to the impugned claim made by the
assessee towards repair and maintenance but the same was not considered. The
AR further contended that the CIT(A) erred in law and on fact in enhancing
disallowance made by the A.O. at Rs. 3,32,785/- under the head "Repairs &
Maintenance" of non-factory building of the appellant without giving any prior
notice to the assessee to that effect on unsustainable and unjustified grounds.
The AR also contended that the CIT(A) erred in law and on fact in confirming
the disallowance of Rs.16,26,000/- by holding that the amount has been spent
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for bringing a new asset into existence i.e. the roof of the godown or for
improving the existing assets that is godown and further erred in holding that it
is a capital expenditure and not allowable as deduction on account of repair and
maintenance. The AR vehemently contended that as a matter of fact and law,
the entire expenditure was incurred by the assessee on account of repair and
maintenance of non-factory building which is allowable as a revenue
expenditure under the provisions of the Act.
8. The AR has also drawn our attention towards appellant's submissions
available on page no. 4 to 10 and submitted that the assessee owns a non-
factory building in the form of godown no. 1, 2 and 3 for storing sugar into it.
The building was constructed and capitalized during the financial year 2002-03
and 2003-04 and subsequently in a strong storm on 25.5.2004, the roof of
godown no. 1 and 3 was badly damaged, hence the assessee constructed roof
thereon and incurred total expenditure of Rs. 19,58,735/- on reconstruction of
it. The AR also submitted that the approval of this expenditure has been given
by the Haryana State Federation of Cooperative Sugar Mills Ltd. Panchkula
vide its letter dated 6.6.2006 and 15.11.2006. The assessee also claimed
insurance against the said damages caused due to storm on 25.05.2004 which
was sanctioned at Rs.7,14,479/- and credited to the repair and maintenance
account (Paper Book page no. 84).
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9. Replying to the above, ld. DR supported the orders of the authorities
below and submitted that the authorities below rightly noticed that the
impugned expenditure incurred by the assessee was capital in nature which
cannot be allowed as revenue expenditure and the CIT(A) rightly held the same
as capital expenditure.
10. On careful consideration of above submissions and perusal of the
assessment order, we observe that at page no. 2 of the assessment order, the
AO had observed that the assessee did not furnish any justification of these
expenses whereas the turnover of the assessee had decreased in comparison to
the last year. The AR during arguments before us submitted that there was a
substantial damage to the factory and non-factory building of the assessee due
to storm, therefore, regular work of the company was obstructed for a long
time, therefore, there was a decrease in the turnover of the assessee in
comparison to the previous year and the cause was beyond the control of the
assessee.
11. From the impugned order, we also observed that the CIT(A) enhanced
the disallowance by Rs.3,32,785/- by holding that an amount of Rs.19,58,735/-
shown under the repair and maintenance was actually pertaining to purchase of
ACC sheets for making a roof of the godown and the amount has been spent
for bringing a new asset into existence i.e. roof of the godown or for improving
the existing asset i.e. godown, therefore, the same was expenditure capital in
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nature which is not allowable as repair and maintenance. From a perusal of the
relevant part of the impugned order, we observe that the CIT(A) has not
afforded due opportunity of hearing for the assessee prior to
enhancing assessment on this issue which is a clear violation of the principles
of natural justice and provisions of the Act.
12. In view of foregoing discussion, we are inclined to hold that as per
factual matrix as stated by the assessee, there was a substantial damage to the
non-factory building i.e. godowns of the assessee which were constructed
during earlier financial years and assessee had to incur substantial amount for
repair and maintenance of roof of these godowns. Neither the AO nor the
CIT(A) have doubted the quantum of the expenditure so incurred by the
assessee and the authorities below have also not considered the fact that the
assessee adjusted the amount of claim which was received from the insurance
company as compensation for the damages caused due to storm. Under these
circumstances, we are inclined to hold that such kind of expenditure incurred
towards major repair and maintenance to restore the proper functioning and
useability of the non-factory building of the assessee company cannot be held
as capital expenditure because we are unable to see any fact brought out by the
authorities below to support this contention of the department that either the
capacity was increased or any new asset came into existence as a result of
expenditure so incurred by the assessee.
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13. Under these circumstances, we are of the considered view that the
explanation, details, bills and vouchers of the assessee and adjustment of
insurance claim require examination and verification at the end of the AO for
proper quantification of the revenue expenditure on the basis of relevant
principles for allowability of the claim of the assessee as discussed above.
Therefore, orders of the authorities below are set aside and ground no. 1 of the
assessee is restored to the file of AO for a fresh adjudication after affording due
opportunity of hearing for the assessee and without being prejudiced by the
observation and claim of the assessment order and the impugned order.
Accordingly, ground no. 1 of the assessee is deemed to be allowed for
statistical purposes.
Ground no. 2
14. Apropos ground no.2, we have heard arguments of both the sides and
carefully perused the relevant material placed before us, inter alia, provision of
section 43B of the Act. Ld. AR submitted that the CIT(A) erred in law and on
facts in confirming the disallowance made by the AO out of interest payable to
Haryana Government by invoking the provisions of section 43B of the Act.
The AR also pointed out that the CIT(A) admitted that the assessee's case
apparently does not fall under any of the clauses mentioned under section 43B
of the Act and under the facts and circumstances of the case, the impugned
amount payable to Haryana Government cannot be disallowed u/s 43B of the
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Act. The AR has drawn our attention towards para no. 4 of the impugned order
and submitted that in spite of the fact that the CIT(A) agreed to the contention
of the assessee, the first appellate authority upheld the contention without any
basis.
15. Replying to the above, ld. DR supported the orders of the authorities
below and submitted that the onus was on the assessee to show that the
provisions so made by the assessee do not fall under the provisions of section
43B of the Act and the CIT(A) was right in upholding the addition keeping in
view the object of insertion of section 43B of the Act to ensure the return of
government dues.
16. At the outset, we find it appropriate to reproduce the relevant provisions
of section 43B(d) of the Act which reads as under:-
"43B
(a) Xxxxxxxx
(b) Xxxxxxxxxx
(c) Xxxxxxxxxx
(d) (d) 5 any sum payable by the assessee as interest on any loan or
borrowing from any public financial institution 6 or a State
financial corporation or a State industrial investment
corporation], in accordance with the terms and conditions of the
agreement governing such loan or borrowing,]
(e) Xxxxxxxxxxxxx
(f) Xxxxxxxxxxxxx
shall be allowed (irrespective of the previous year in which the
liability to pay such sum was incurred by the assessee according
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to the method of accounting regularly employed by him) only in
computing the income referred to in section 28 of that previous
year in which such sum is actually paid by him:
Provided that nothing contained in this section shall apply in
relation to any sum referred to in clause (a) 8 or clause (c)] 9 or
clause (d)] which is actually paid by the assessee on or before the
due date applicable in his case for furnishing the return of
income under sub- section (1) of section 139 in respect of the
previous year in which the liability to pay such sum was incurred
as aforesaid and the evidence of such payment is furnished by
the assessee along with such return:]"
17. From bare reading of the impugned order, we observe that the CIT(A)
upheld the addition with following observations and conclusion:-
"4. Ground of appeal no. 2 pertains to disallowance of
Rs.1,42,97,973/- u/s 43B of the IT Act. The AO has discussed
the issue in para 3 of the assessment order and has disallowed
the amount because the same is 'payable'.
As per the appellant this is not a statutory liability
coming under section 43B of the IT Act. It has been submitted
that the Mill has taken loan from Haryana Govt. for making the
cane payment of Sugar Cane growers in different financial
years and on the loan, interest of Rs. 1,42,97,973/- has been
claimed because it has accrued to the Govt. It has also been
submitted that the sanction of the loan in the form of financial
assistance was approved vide order dated 18.2.2003 according
to which the loan was to be repaid along with interest @ 11.5%
within a period of 5 years in annual equal instalments along
with interest. As per the appellant the loan has been given by
Registrar Co-op Societies Haryana which is neither a
Scheduled Bank nor any Financial Institution.
The issue involved and the submissions made by the
appellant have been considered. Section 43B pertains to
statutory liabilities which are allowable only on actual payment
basis and on the amounts of interests etc. which the appellant"
should pay to financial institution etc. on the loans given to it.
The purpose of the section is to ensure payment of dues to the
Govt. and the financial institutions etc. The appellant's case,
apparently does not fall under any of the clauses mentioned u/s
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43B of the IT Act; however keeping in view the object of
inserting this section i.e. to ensure the return of Govt. dues, and
the terms & conditions of the order dated 18.2.2003 giving the
loan, the claim of the assessee does not appear to be admissible
since it has not paid the loan installments along with interest
during the previous year relevant to the assessment year; rather
it has been submitted during appeal proceedings that no
installment of loan or interest was paid by the appellant and the
entire loan was converted into equity capital of the appellant
keeping in view the financial status of the appellant. In view of
the aforesaid, keeping the objects/purpose of section 43B of the
IT Act the disallowance made by the AO is confirmed and the
ground of appeal is dismissed."
18. From the operative part of the impugned order, we clearly observe that
the CIT(A) has noted that the assessee's case apparently does not fall under any
of the clauses mentioned u/s 43B of the Act which is not a proper and judicious
approach. Keeping in view the provisions of section 43B of the Act and proviso
attached to that, it is very clear that the main intention of the legislature is that
deduction otherwise is allowable under the provisions of the Act in respect of
the sum paid and shall be allowed only in computing the income referred to in
section 28 of the Act of that previous year in which such the sum was actually
paid. But the proviso clarifies that nothing contained in this section shall apply
in relation to any sum referred to in clause (a) or clause (c) or clause (d) which
is actually paid by the assessee on or before the due date applicable in his case
for furnishing the return of income under sub- section (1) of section 139 of the
Act. On the basis of foregoing discussion, we are of the view that the
authorities below have not adjudicated the issue as per letter and spirit of the
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provisions of section 43B of the Act. The AO ought to have verified and
examined the claim of the assessee mainly on two counts: i) whether the
claimed sum was actually paid and; ii) the amount was actually paid by the
assessee on or before the due date applicable in its case for furnishing the return
u/s 139(1) of the Act. Thus, we find it just and proper to restore the issue to the
file of AO for proper verification and examination of the claim of the assessee
in the light of provisions of section 43B of the Act. Accordingly, orders of the
authorities below on the issue are set aside and the issue is restored to the file of
AO for a fresh adjudication as per directions as stated above after affording due
opportunity of hearing for the assessee.
19. In the result, ground no. 2 of the assessee is also deemed to be allowed
for statistical purposes.
Ground no.3
20. Apropos ground no.3, ld. AR submitted that the assessee actually paid
audit fees of Rs.3 lakh to the auditor which is an allowable expenditure as per
provisions of the Act and the same cannot be disallowed merely on the basis
that the assessee did not discharge his liability before due date of filing of
return. The AR also contended that if there was any old liability against the
assessee due to financial constraint with regard to audit fees and the same was
paid in subsequent year, then this also cannot be a basis for making
disallowance. Replying to the above, ld. DR fairly accepted that the assessee
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actually paid an amount of Rs.3 lakh towards auditor's fees and the AO has not
raised any doubt about the genuineness of this payment.
21. On careful consideration of above submissions, we are of the view that
the auditor's fees is a necessary business expenditure which is allowable u/s
37(1) of the Act and additions made in this regard are not sustainable and we set
aside the same by directing the AO to allow the expenditure incurred by the
assessee towards payment of auditors fees. Accordingly, ground no. 3 of the
assessee is allowed.
22. In the result, the appeal of the assessee is partly allowed on ground no. 3
and deemed to be partly allowed for statistical purposes on ground no. 1 & 2.
Order pronounced in the open court on 20.10.2014.
Sd/- Sd/-
(G.D. AGRAWAL) (CHANDRAMOHAN GARG)
VICE PRESIDENT JUDICIAL MEMBER
DT. 20th OCTOBER, 2014
`GS'
Copy forwarded to:-
1. Appellant
2. Respondent
3. C.I.T.(A)
4. C.I.T.
5. DR
By Order
Asstt.Registrar
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